Tag: private equity

Carl Bradshaw

#22 Carl Bradshaw, Goodwin

Fund Shack
#22 Carl Bradshaw, Goodwin
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Carl Bradshaw is a partner in the law firm Goodwin’s private equity group. He has advised European, American and Asian private equity sponsors on cross border LBOs, public to privates, co-investments and special situations.

We talked in late March 2021 about deal appetite going into the second quarter of 2021 new deal-making processes and the rise of the special purpose acquisition company. You can watch the video version (with speed controls and bookmarks here).

Ross Butler:

You’re listening to Fund Shack. I’m talking with Carl Bradshaw, a partner in the law firm. Goodwin’s private equity group. Carl is based in London and has advised European American and Asian private equity sponsors on a wide range of transactions, including cross border elbows, public to privates co-investments and special situations.

Carl, welcome to fund Shack it’s mid-March and restrictions are slowly thawing away in Europe, fairly slowly in the UK though. How are you seeing the private equity market from a transaction perspective? And how would you characterize sentiment at the moment?

Carl Bradshaw:

Yeah, so Ross we’ve been sort of in this state however you wish to describe that for nearly a year now, the conclusion that we can say is that the industry is certainly resilient is certainly adaptable. Absolutely. There was a rush this time, last year for people to focus on keeping people safe and you know, wrapping up their portfolio companies, frankly, to all the things that were going on, making sure they had enough liquidity to survive initial shutdowns and lockdowns but very quickly people that to operate in this environment, whether that was, you know, using technology to get deals done, to meet people, to talk and look and evaluate or, or just in terms of actually finding opportunities. And you know, within months we were back into transactional activity certainly in, in, in the middle market where you had, but it’s a combination of processes that had been put on hold that were sort of pushed through and we’re ready to come to market either just to close off remaining elements or, you know, from start, start to finish, we saw that.

Carl Bradshaw:

And then you had a sort of new wave of, of deal activity where it was either very technology focused or very healthcare focused. And that has really sustained itself through to, through to now. I think obviously in, in some sectors, there’s, there’s been a pause and people are waiting to see what the vaccine does, what the government support measures do and when, and how they get withdrawn in order to assess sort of investment appetite. And obviously we need to see how consumers react, to those measures as well. But certainly in certain sectors, the market’s heating up and we’ll say pretty buoyant buyout activity, whether that’s funded through equity checks from the sponsor directly, or backed up with debt either coming in from, from still, still the bank, but increasingly so from the credit funds yeah, it’s, it, it sent me that to be seen. And in some cases we’re seeing some really competitive situations, but for the assets in the sectors, I mentioned that, you know, people want to, to deploy capital into

Ross Butler:

Those sectors, presumably being tech, healthcare.

Carl Bradshaw:

I think those are it certainly as you get into the middle market and, and above at the lower end, you’re seeing some life science you know, as a variation on that, on the healthcare theme. And even, even within technology, I think it’s, it’s not everything not everyone’s sort of pouring money into driverless cars. I think there’s been some quite a lot of thinking has been done on what segments are going to be most robust and have proven themselves most robust three, three dash periods, enterprise software, data analytics, and things of that nature are certainly still, it’s still very popular with, with PE sponsors.

Ross Butler:

It’s increasingly difficult to think of tech really as a sector in sofar as pretty much every business has. It is having to deal with some kind of tech enabled conundrum right now.

Carl Bradshaw:

Yeah, I think, I think that’s right. I mean, there’s, there’s often been a hesitancy for private equity to to market themselves as being into the tech sector. Right. And I think people, investors into be fathers might be a little bit scared off by some of the very high valuations that you see in the tech sector. And whether that growth the businesses like you, you have the opportunity to invest into is going to be sustainable. You know, other there’s other features of the tech sector, whether it’s the dynamics with founders and entrepreneurs or you know, the, the, the lack of the excellence of process that P has really become accustomed to that has stared at people traditionally away from deploying lots of private equity capital into that sector. But you’re right. I think it would be inaccurate to just group group all of the different segments in, in the same bucket.

Carl Bradshaw:

I think private equity has come around to the idea that yes, technology is in all parts of our life and tech enabled businesses means need to sort of find capital in order to grow in order to survive in, you know, the, the most dynamic areas of the economy today. So yes, there’s more and, and also, I guess there’s been some good good examples of success in that area, whether it’s fish there or Thoma Bravo or Hg, people have gone there, have taken the plunge in and done very well after that. So, certainly there’s no there’s not the same hesitancy as there may have been 10 years ago to, to invest in that area.

Ross Butler:

It’s strange given that their venture capital cousins live and breathe technology, I think Goodwin’s sometimes operates at the intersection of venture capital and private equity from what I’ve read.

Carl Bradshaw:

Yeah, very much so. I mean, we, we see that as our sort of strategic priority is to be as close to those two worlds as possible because we’re only seeing convergence and not divergence. And I think the, the peas are moving down into that space. One to just get smarter on technology and the pace at which it is you know, transform, transforming business. And they, they want to get an early early look to, I think the P exits or venture capital backed businesses exiting to pay. It’s just becoming more and more common. And I think even, even you know, in 2020, we sort of doubled on the amount of PE exits that were there the year before. So it is an area that people see that the opportunity, and I think getting, getting smarter is, is definitely something that is high on the agenda for our clients fit for Goodwin. We just say as part of the lifecycle model that we’ve tried to build around companies from a very early stage three, all the way to where they’re going through a strategic process, be that M and a selling out to P or, or going through it to the problem,

Ross Butler:

Going back to lock downs. Has anything changed in terms of the process of doing deals in the last year that you think possibly might end year in the, in the longer run? Yeah,

Carl Bradshaw:

I think, I mean, the obvious answer to that is travel. I think people will get on fewer planes and meet in person on a, on a less frequent basis. I don’t think it will go all together. There’s definitely a lot to be said for I guess both the, both the engagement that needs to be had between a management team and its potential new sponsor to, to get those people together is going to continue to be important. And I think, you know, people, people that are, that I talked to on the investor side are just, you know, itching at the opportunity to get in a room and have those conversations with the management teams or prospective management teams, I think on the advisory side whilst we’ve been efficiently through, you know, remotely and three screens definitely when it comes to getting things done, we would say some, some speed gains and just general sort of ability to get things over the line by being in the same, in the same room with each other.

Carl Bradshaw:

So I do see that coming back, but certainly the use of technology based on the outside intelligence begins early and has been happening from people’s bedrooms or studies, you know, for the last year that’s, that’s definitely a game to enjoy. And, and Adam was already the case, to be honest, there was a lot of technology starting to get deployed in whether that’s through data rooms, whether that’s through you know, the legal technology we use to sort of save street contracts and spit out findings. I think that that has accelerated over this process. And so we’ll certainly see, see that remain whether the remote what I’ve heard of virtual drones being used to do physical inspections, and obviously that, that saves some costs. And if you’re not fully committed on doing the deal, you might, you might think about that. But I think getting people together and on, on the ground is probably gonna come back as, as soon as it can.

Ross Butler:

It’s funny. Cause most people took a technology in terms of efficiency gains, but I guess was something like, you know, the, the classic late night deal negotiation high, it’s a highly collaborative exercise I assume. And just being with people is probably preferable, maybe even less tiring, even if it is late at night.

Carl Bradshaw:

Yeah. I see you had this, let’s not forget the psychological aspects of doing a very demanding job on it, on a deal. Yes, absolutely doing it physically in person with others helps. But yes, just, just getting through that process. I think what we’ve seen is whilst as, as well thought through, in as structured as they possibly can be in this very uncertain environment, there they are generally taking longer just to, to execute and getting, you know, getting the answer from someone who’s not knowing the room, we’ll just take extra time. And then in putting that to a conversation that moved on three or four paces can be difficult. So yes, I think that there’s merit to getting people together, certainly from, from our perspective as a, you know, we’re very much in a Prince trip culture as having people around from the outset of their careers that they can learn and see how these things are happening, I think is, is an important aspect as well.

Ross Butler:

Has anything changed in terms of contracting given the advent of lockdowns, I’m thinking, you know, provisions to give buyer’s assurance is that of thing.

Carl Bradshaw:

Yeah. So there’s a few sort of pieces of that, I guess. Initially there was great concern about, well, you know, the certainty of a deal actually happening. So if you had the leverage on the, on the buy side you would want, you know, potential out to the deal, if the lockdown or some sort of pandemic related aspect made for a materially different investment proposition and the one you thought you were signing up to three months earlier. And so certainly those conversations have been had, I would say by and large because the market is still very much, you know, lots of capital to deploy low interest rate environment. Sellers are invariably resisting those sort of deal uncertainties that you know, but that gives the buyer the right to walk away or renegotiate the deal. So that, that’s definitely one aspect that there’s been more conversations around and it very, very much turns on the sort of dynamic of a buyer and seller in any given situation.

Carl Bradshaw:

I think Ben, in terms of due diligence, your you’re seeing more scrutiny placed, not just on the underlying sort of the business and how compliant it’s been during this period, whether that’s the health and safety aspect of how it’s looked after its people or whether it’s made use of government support measures, you know, furlough schemes, deferral of taxes government loans, in some instances, you know, there’s, there’s definitely a lot of sensitivity to make sure businesses got that right, or where they haven’t, where when you remedy can be can be pursued. And then as I saw, aside from that, I think investors are looking through these businesses and out to their end customers, right? So instead of just supply to supply chain continuity, which has always been important, but come under the spotlight in the last 12 months, people are saying, well, you know, is that supplier or is that customer, what, what’s their solvency situation?

Carl Bradshaw:

Are they going to be able to continue? Can we get access to that information and diligence and evaluate it as part of this in entire cycle? So yes, there’s been a number of changes, but at the same time, it’s very sector specific. I think in the, where there’s competition for assets, we’re seeing very similar treatment given to businesses. You know, we will look at the financials, we’ll take the ties on the accounts. We will take a a large amount of comfort from re-investment on the part of the management team into the new deal. We will rely on insurance as far as possible, and we will present in a competitive auction, a very contract, but you know, the salaries are not going to have to do much thinking about as to whether it’s within, within the level of comfort or not. So yes, in some circumstances the pandemic has changed terms, but in, in other ways now, you know, we’re, we’re very much in similar territory of, of getting deals done on, on a seller favorable basis.

Ross Butler:

In addition to traditional private equity deals, you’ve got fair bit of experience in the distressed market, corporate distress fields. Are you, are you seeing, or do you anticipate an uptick or an increase in that kind of transaction?

Carl Bradshaw:

Yeah, so for me, those types of deals, whether that’s, you know, out and out distress or a special opportunities, special situation for private capital to be deployed into is different. Another type of private equity deal. It may find its way into a different area of the capital structure, but very much were using similar sort of private equity mindset and deal technology to, to get the deal done. I think the, the latest on the market is that actually there’s not a ton of activity right now. So in 2020 we probably saw cases that had been in a bad state of affairs, you know, financially distressed or underperforming for some period of time prior to the pandemic. And the pandemic was the final straw. Certainly, you know, retail, casual dining has had a very tough time in the last 12 months.

Carl Bradshaw:

And we’ve seen some of that. So we reacted on the restaurant and loan to own restructuring where the lenders to control. And recently we just closed the Clark’s choose transaction where Asian, Asian, private equity invested into, you know, an iconic British brand. So we’ve seen some of it, but I think that all came out of a relatively small window last year. Those sort of existing cases that needed support, I think by and large a lot of businesses have got by to this point through the government support measures, whether that’s, you know, loans or, or just the fact that business rates haven’t been there or at the same levels as, as they were previously. So I think we’re waiting to see, I think the expectation is absolutely there will be a further wave of distressed businesses, whether they make it through this difficult period or not remains to be seen.

Carl Bradshaw:

I think there’s the, there’s a race now between getting the vaccine out, getting consumer confidence to the level, it needs to be, to restore those businesses to somewhere near where they were previously, are people going to all of a sudden June go out and buy things, go out and eat in, in the places where, where they used to and offset against well, w where is the cash coming from to sort of reboot the working capital of these businesses? Right? So they have used the treasure chest to, to get through this period in order to go forward and compete. They’re gonna need likely injections of capital. Now, in some cases that may come from existing shareholders who have deep pockets. In other cases, they may tend to the public markets where currently there is good appetite to put money to work. But in, in many cases, I think they will turn to, you know, private credit, private equity, alternative investing and certainly that’s something where we’re building up for and hoped to, you know, in the, in the nicest possible way be well-prepared to fight, find capsule solutions for these businesses to take them forward.

Ross Butler:

Well, that’s a perfect segue because I did want to ask you about specs, which is obviously all the rage, but really only in the U S to a great degree. But last year was huge and this year is even bigger. Pro-rata do you have any views on the prospects for special acquisition vehicles

Carl Bradshaw:

And get really closely? I mean all the teams in the U S are absolutely inundated with spot instructions on inquiries. And just to, to kind of break that down a little bit, these are essentially the code in the U S these blank check companies. So they’re put together by a management team or a sponsor effectively as a shell company that is then put to the public market investors, pull money into these vehicles, and then the vehicle goes out and finds it at target a cloud product company that then takes to the public market. So it’s almost like a reverse IPO for those private companies. And it’s attractive to investors because they almost get a sort of single purpose, private equity vehicle, right. It’s something they can back if they know the sponsor, they know the management team they can put money towards it.

Carl Bradshaw:

And then, you know, they, they back these management teams and sponsors to go out and find it a great private company. And, and it’s also attractive sometimes. So they’ve project companies looking to raise finance, you know, to fund it it’s next stage of growth because it takes what is otherwise seen as an arduous listing IPO process out of the equation. And they only have to do one negotiation with the spec management team or that all the sponsors. So it does bring that execution advantage, I think for, for public strategy. We haven’t seen all that much of them in the UK. They have existed. I mean, there’s businesses like the engineering giant Melrose, that was a spec from 2003. So they, they are around, but, you know, on a comparable basis. So in the U S there’s something like 223 spots listed this year already.

Carl Bradshaw:

And in the UK, there were for all of last year and, you know, a grand total of 300 million was, was raised through that process it in the UK. So there’s a huge disparity. And I think there is definitely an effort on the part of London stock exchange and other sort of market majors to look at that and assess, you know, are, are we missing out on this opportunity? And I think that they’re coming under pressure because you’ll see homegrown talent that would otherwise, you know, potentially IDEO in the UK or other European markets either look instead of the us and, and potentially even B B not the victim, but the target of these U S rates backs, right? So it’s, it’s a great investment opportunity going into the North American capital markets instead of staying, staying in Europe. And I think there’s two, two particular pressure points that is and, and it all comes down to the nuances between the, the UK capital markets regime and which is similar in some respects and elsewhere in Europe and what they currently have in the U S so one of these is the redemption feature.

Carl Bradshaw:

So in, in the us, you, you, as an investor, put your money into this spot, the spot goes out and finds a target, and then comes back to the shareholders and says, do you want to, do you want to have to make this acquisition or not? So it’s put to a vote at that at that time, you can either vote no vote. Yes. but you can also you know, redeem your investment. So if you lose the value, you’re still not locked in and you can get your money out. And someone else who likes that, that investment can come in in your place. So there’s that advantage that kind of transparency over the, the acquisition and the liquidity that, that you get through that. And then the other the other feature of the UK regime is that because it’s considered as a reverse listing effectively at the time, the SPAC makes the acquisition or announces the acquisition the shares in that spot or suspended for traded and they’re suspended until a perspective on the deal is, is published and there’s no deadlines.

Carl Bradshaw:

So we still have 2017 rates back. That perspective didn’t have it hasn’t been done in that deadlines not being, or that deliverable hasn’t been met. So it, it does create that uncertainty for investors, which I think, you know, looking at it objectively means, you know, w if you had the choice, would you prefer the us model or the current UK model? I think, you know, people are voting with their feet and, and investing into, into the U S backs. I mean, that, that particular feature is there for investor protection. I think when the announcements made that can be a lot of volatility in share price. And so having that, the suspension for a short period of time may make some sense, but it’s certainly something that, that people are looking into is, is a reform needed. There was a review conducted recently by Lord Hill and delivered to the government and at the start of the month, that really looked into all of those things as a, as a sort of holistic EK listing review. And certainly those two features were, were underlined as well as the things that were probably most, most in need of some sort of reform in order to increase spank activity in, in the UK. And the threat is not just coming from the U S but I think now you’ll start to see European markets moving pretty quickly in it. I would say at the current rate, you know, by the end of this year, we could see much more activity in the European markets on that front,

Ross Butler:

Any, any ones in particular.

Carl Bradshaw:

So Amsterdam, I think, has made noises in the last few weeks where they are readying themselves to, to, you know, make, make a viable and attractive destination for the specs, the visual specs to be raised.

Ross Butler:

So if I understand you correctly, it sounds like the, the, the Americans would, their redemption system is created kind of a, a market based optionality for investors. Whereas in the UK, you have more of a regulatory based freeze on everything. And is that a reasonable interpretation? Yeah,

Carl Bradshaw:

But that’s exactly right. I think it’s the, the, just new liquidity, but also the, the, the involvement in that acquisition decision, almost that you get in the U S that you’re not saying encouraged me here in the UK you know, this bank has the options of the acquisition to a vote, but it’s not a regulatory requirement in the same way as it is in the us. Yeah. That is a key distinction.

Ross Butler:

Yeah. It’s, I find it fascinating because, I mean, obviously the number of public companies has been falling for a very long time. And presumably this is going to put that into, into reverse. And it must say something about, I mean, you said at the start where you implied at the start, I think it’s, to some degree, an arbitrage against the cumbersome nature of IPO processes, would you say yes.

Carl Bradshaw:

Yeah. I think there’s definitely a benefit to the, to the company, not having to go through that IPA, do the road shows with multiple investors, you know, in that sort of preparatory stage and just goes straight from a to B you know, suddenly be a public company, having negotiated a deal in a set of terms with you know, with a sponsor. I think that’s, that’s very attractive for companies.

Ross Butler:

Tell us a little bit about Goodwins and your personal aspirations for activity in, in private equity, in a kind of near or medium term, what would you like to see happen and what do you want to get involved in?

Carl Bradshaw:

So Goodwin’s been around in Europe for just under 10 years, but we’re originally a us headquartered firm. We’ve grown internationally into Europe and across into Asia about 1300 lawyers in total, and really we have a very focused strategy. So we’re trying to play in the most dynamic areas of the economy. Private equity is absolutely core to that strategy alongside technology, life science, real estate and financial institutions. And you know, we’ve, we’ve scaled out incredibly quickly in the last year within private equity in London in particular. So we’ve now got upon a bench of about 10 partners, associates another, another 20. And we’re trying to be deep, not just in that transactional capability, but across all areas that touch the private equity ecosystem. So we’ve got one of the largest fund formation things in the market. We’re building out in tact, we’re building out in debt we’re building out in restructuring. So we can really be that go-to sort of destination firm for complex premium private equity work.

Ross Butler:

Carl, it’s been a pleasure talking with you. Thanks very much for your insights this morning.

Ross Butler:

You’ve been listening to the fund shack podcast, make sure you subscribe and visit our website@fun-shack.com for many more video interviews. It’s the private capital channel for alternative investment professionals.

 

Carl Bradshaw

Carl Bradshaw, Goodwin

Carl Bradshaw is a partner in the law firm Goodwin’s private equity group. Carl is based in London and has advised European, American and Asian private equity sponsors on a wide range of transactions, including cross border LBOs, public to privates, co-investments and special situations.

We talked in late March 2021 about deal appetite going into the second quarter of 2021 new deal-making processes and the rise of the special purpose acquisition company.

You can listen to the podcast (audio-only version) including transcript, here.

John Gilligan

#20 Private equity demystified

Fund Shack
#20 Private equity demystified
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Demystifying private equity on Fund Shack, with Oxford Said’s John Gilligan and the ICAEW Corporate Finance Faculty’s David Petrie

Private Equity Demystified is on the reading list of business schools from Boston to Singapore. It is now in its fourth edition, and in this podcast we speak with John Gilligan of Oxford Said and Visiting Professor at Imperial, who co-authored each editions alongside the late Mike Wright. We are also joined by David Petrie, Head of the Corporate Finance Faculty at the ICAEW, which has been a strong supporter of the initiative and, without whom, ‘the report would never have seen the light of day.’

We discuss the need to demystify, the outperformance debate, the power of M&A done well, and the need to adapt to a very uncertain future.

 

Ross Butler

David John, welcome to fund shack. I was wondering if we could begin by John giving us a little bit of an overview as to the provenance of private equity demystified, which is now in its fourth edition. And then we can get onto the process of demystification and talking about private equity in this brave new world that we’re in. So I believe that the first edition of private equity demystified in about 2008, which was at the very Dawn of a very different kind of crisis. John, take us through it.

John Gilligan

The backgrounds of this with a conversation over lunch, all good things happen over lunch. I was having lunch with Chris ward, who was the chairman of the Institute’s corporate finance faculty, the ICAEW. And at the time there was an investigation going on at the treasury select committee into the private equity industry. I was on gardening leave between leaving Deloitte and joining BDO. So I was one of the few people who was actually watching this live on tele because I was at home. Everybody else was obviously at work. So I said to Chris, have you seen the treasury select committee investigation? Cause it’s a little bit odd because the questions are very simplistic and the answers, therefore don’t make the industry look very show the answer in the best light. Shouldn’t somebody maybe write a note to somebody to just suggest how it basically works in principles so they could move on to the more interesting substance.

And what Chris said to me was, well, you’re not doing anything. Why don’t you do it? So I then phoned Mike Wright and Mike was my PhD supervisor at the time and said to Mike, well, you’re the leading academic in this field? Could you summarize all the academic stuff? And I had a sort of hidden agenda. I thought I’d get a free literature review for my PhD, but Mike saw through that one. So what happened was we did this and before we knew it, we went back to the ICAEW with Chris and said, well, we seem to have sort of written a bit of a book cause it got longer. And it just coincided with the ICAEW started to think about thought leadership and these sorts of things and such said, well, why don’t we just do it as a thought, a thought leadership piece and then the great, good fortune of life. We published it with a lot of help from people. And I said, it won’t be a huge amount of help from people actually. And then Harvard business school put it on their reading list and you thought, Oh, that’s handy. So that’s, that’s the background to it. And then once we were off the global financial crisis came along. We need to rewrite because the world changed dramatically. And we rewrote about every couple of years David and we’ve done it. So

Ross

A very kind of organic needs led process. David, why did you think that it was a project that was worth really kind of getting behind and supporting

David Petrie

Well, as John said, it, it, it had a very definite need at the time and you know, the, the BVCA does, does excellent work in this area. And it’s not to say, that, you know, they, they don’t constantly advocate the sector, but we, we felt that there was a little bit of a gap perhaps in the perception of politicians and policy makers really. You know, there is, there is this idea that if a particular professional body or a trade association comes to politicians and says, you know, well, you should be doing this because it’s in the national interest, they tend to say, well, w well, in the words of Mandy rice Davis, you know what you would say that wouldn’t you there is always this, this difficulty that they would tend to see them coming and say, well, of course you’ll pay to represent the, you are as it used to say, the voice of private equity and venture capital whereas the Institute of chartered accountants does as part of its Royal charter include the provision to act not only in the interests of the profession, but also in the wider public interest.

And so the analysis that John and Mike did, has kept things up to date really with what’s been going on private equity industry. Certainly, certainly hasn’t stood still, but as John has also said, it has become a really very comprehensive text. And it’s useful for members of the corporate finance faculty and more broadly people hoping to enter the private equity sector as well as principals and investors in it. I think these days, because it is such a comprehensive piece of work you know, I think they probably started off attempting to write a relatively short book and found that actually what it is an extremely complicated and nuanced sector actually, and to understand it properly, it isn’t possible simply to set it out briefly though our levels of complexity that I think that even people working in the sector may not fully appreciate. And the fact that it is it’s sites over 200 academic references means that when we’re having discussions with policy makers in white hall and Westminster about the importance of private equity and its contribution to the economy and so on, you know, the evidence is irrefutable.

It is grounded in very solid research is, is not simply the view of a trade body. This is really solid stuff, but it also works very well for practitioners, for our, you know, younger chartered accountants who are wanting to make their fortune and private equity. This is a really good place to start in terms of how, what are the nuts and bolts of the business. So this is why business schools above it. And I’m sure John would be able to talk about this a lot more because it really genuinely is on the reading list of business schools from Harvard to Hong Kong. So it works at all sorts of different levels. It, but it busts myths on the sector and explains that it does add to economic value. And it also is candid about some of the criticisms leveled against it, but it also provides a very useful how to guide and that’s what we like. So you know, we, we are delighted to support it and to continue to do so, because it works for us at so many different levels.

Ross

I think that’s a really great summary. That is really the impression that I got reading it as well. David, just to look at the political side, I mean, it’s not an apolitical book, but it is incredibly balanced. And I think there’s a lot of academic work out there. Even that’s highly critical of private equity. And I think where, where things are known and the facts are put forward and when then where they’re not known, I actually think you’ve got a section John saying, you know, look, look at the evidence base. And often it’s not there for private equity.

John Gilligan

Well, one of the things we set out to do was not to be an advocate for any particular point of view, but to allow people to get to the point where they can ask the question and decide for themselves. So the whole idea of gathering together, the evidence was we only use evidence that is rigorously academic. So we don’t, for example, use pretty much any evidence produced by people who have an ax to grind one way or the other. So we wouldn’t use evidence from a trade body without commenting on it. So it’s all of the, all of the reference cited a peer reviewed. So the first point is we’ve done the exercise to get the data in one place. If you look in the appendix in appendix six, I think it is, it’s all there. It’s summarized in one paragraph. So you’d have to read the paper either, but there are paper references there.

If you want to read the paper. So if you want to dive into there, you can go there if you want. And the idea is to say, well, this is what we know, but here’s, here’s what we don’t know. And here’s the stuff that, where people have strong opinions where their opinions are based upon evidence. That’s. I mean, the evidence has been growing, but evidence is incomplete because one of the problems, I mean, it says it on the 10th, private, you know, it, I don’t think private is private because deliberately secretive. I never, I’ve never believed that. I think the private equity didn’t really care about communicating outside of its closed circle for a long time, because they never really thought about it. When we started, we made the point that private just means not quoted. It doesn’t mean secrets. It’s become, there’s become a public interest in it because it’s not so big and that’s legitimate. But back in the day, people say it’s secretive. It wasn’t secretive. They just hadn’t really thought about communicating with the people who didn’t to that point, how an interest. So we have, we’ve been through this process of unpeeling, the onion, where data has become available. People would come or interested. And a lot of the early academic research turned out to be wrong because the data was wrong. So a lot of it’s been rewritten. Some of it good, some of it bad.

Ross Butler

Yeah. I certainly didn’t get the feel that I’d be, I was being preached to, and to David’s point that it can appeal to many different constituencies. It really does feel like a manual. I feel like if you gave me a hundred million, I can at least go through the motions of managing a private equity fund. And every time I get stuck, I could just pick it up. Now there’s a, there’s a, there’s a lot of skill that goes into it, but you certainly kind of hit all the points in terms of, you know, from start to finish.

John Gilligan

The thing that we learned as we were writing, it was we started by, we were the first people to sort of sit down and try and write something that wasn’t either aimed at the management of the company during the buy-out or the investor in a fund. But we’re trying to just say, look, here’s the big picture. And here’s how it works. So it was more curiosity than, than anything else. And what became clear as we did each edition was this is an industry that is very intricate. It’s not complicated, but it’s very, very intricate.

And if you don’t understand the intricacies, you can’t draw the right conclusions. So the classic one is taxation of current interest. Taxation carried interests top of the agenda at the moment. Most people don’t understand a really important point about the taxation carried interest. The definition of carried interest in, the tax legislation is that amount of capital that is taxed as carry that amount of, of return. That’s taxed as capital in an LP agreement, carried interest is 20% of the return. They’re two different things because the return has interest fees and capital. So in the tax legislation, it’s defined as capital in the LP agreement. It’s 20% of all the profit. If you do the arithmetic and look at how much return comes from interest fees and capital, you’ll find it’s Ferris and fund to fund, obviously, but a lot of return comes from interest and fees.

That’s taxes, income. So a large proportion of carried interest is taxed as income already, but unless you know, that the definition and the tax legislation is different to the definition in the LP agreement, you’d never know that. And you have no idea how much time I spend talking to journalists explaining that the thing that’s certain in the tax legislation is different to the thing that’s written in the LP agreement. And it makes a difference what the tax rate is and has any journalists picked up on it and written it in front of genders. They’re interested in, and now we’ve, you know, there was an article in the Ft recently, and that point has now been been made, but it’s not try explaining that in a headline. And it’s not very exciting either, but it’s important.

David Petrie

Yeah, we certainly find it very useful when we’re talking to officials in the treasury and so on about fiscal policy and how that relates to government investment programs and the development of new funds and so on, which is what we’ve been quite busy attempting to assist within the faculty over the, certainly over the past nine to 12 months as the government has looked at other measures, which might increase the flow of funding into those bits of the, that are short of cash. And you know, there are all sorts of you know, in a crisis, all ideas are considered however, however, left field. And so sometimes it’s been quite helpful to us to be able to explain to people just how some of these things work, but in a context of an open meeting, you can’t necessarily do that. It’s actually quite handy to say, I’ll tell you what, I’ve got, something that I suggest you have a look at that just, you know, you can’t really say to people, you need to start with the basics, but if you are looking to do that, this is, this really is a very, very good place.

So I do use that to help people gather a sort of a background understanding of how some of these things really do work. And and, and it really is. It really is very effective from, from that perspective. And also, I think one of the other things that is particularly important about this latest edition is that John covers in some detail, not just some of the changes over the past two or three years in terms of the way that private equity funds have been well doing just that raising funds and structuring themselves and what this means for the broader economy in terms of systemic risk. So there are some important factors there that the government officials and the bank of England have been looking at, and we’ve had helped them use this addition to explain, but also more broader questions about, you know, how should public money be allocated to support businesses that might be struggling at the moment.

And again, that is touched on in the addendum to the text, which John wrote with Jim Strang after the original copy had gone to press. So there are a few, well, not a few, there were a lot of very important policy implications throughout the document, I think all throughout the publication, but we’ve certainly found it been very useful to support our work in determining policy, which then in turn leads to government intervention. So it’s it’s a useful underpin to actual fiscal policy when it’s working at its best. And I can say that there have been times when we have used it to to aid understanding and and it, and it’s proven very effective.

Ross Butler

I thought that the book was worth getting just for the penname that you wrote John with with Jim Strang, which is just a couple of pages, but I thought it was really interesting looking at how things are, you know, cause everything’s changed now. Right. But my impression from those pages was actually that I’d be relatively sanguine from the perspective of a private equity fund investor, but that perhaps some other constituents might feel some heat.

John Gilligan

Yeah. Jim Strang and I read that in April and it was the first thing that was first time we’ve ever tried to write anything with people when we couldn’t sit in a room together. So it was first time we did anything over zoom, which was the first word thing, but the private equity she’s been through a number of cycles. I mean, depending on how old you, I started in 1988, I lost track of how many crises I’ve done. This is obviously a longer and different one, but the industry has come through. Many of them and each time has gone in, there’s been this fear that the leveraging things will cause a problem. That’s essentially at the heart of what they, what the issue is. People concern that overleveraging things will amplify results that are bad and that will be bad. And we’ve argued for 13 years or whatever you were writing that because the funds haven’t been leveraged.

Now, there’s, there’s been changed in the fund structure, which means that’s creeping in. And we kind of said in 2007 that’ll happen. And it is a, but we don’t think at the moment is any evidence that that’s going to cause any kind of systemic risk. But the thing that is different is the structure of the banking market, which is radically different. And that’s, that’s the overflow from the last crisis. You know, the GFC changed the rules of banking to make the economics of leveraged finance different. There’s more catio on capital in banks now than they used to be against leveraged debt. And that allowed the debt funds to come into the market. So many of the debt funds in Europe essentially were the mezzanine funds. You started moving down the capital structure and then the us model came over here.

Those funds are leveraged and indeed some of those funds leverage each other and there’s as yet, that’s not yet been through the mill in Europe, it’s been through the men in the States. The concern is that some of the smaller funds, because these funds are actually relatively shorter, so privately funds 10 years. So if you’re going to have a crisis, every, every decade, you’ve got to probably hit war on average debt funds are shorter. So if you raised one in your first fund and you went into the crisis, you will have no ability to have no track record, to raise money for the next ones. So we have a, quite a fragile environment for some of the new entrance into that market over the last decade. And when we come out of that, of this crisis, which we will in the world will be better.

 

John Gilligan

It will be, it’ll be interesting who survives and who doesn’t, if you pitched yourself as a retail uni charge provider or a travel sector specialist, you know, the world got bad and there’s nothing you could done about it. It’s just, it’s just a caustic event. Conversely, if you’re a turnaround investor, maybe the world got more interesting. But the one thing we do know from each crisis, this is always been a good time for the equity investor writing checks. When the world has been bad, has been a good strategy over the years for the, for the GP. Interestingly for the LP, the evidence is that you can’t pick the time to invest because you don’t make the investment decision that the GP does. So when you can make an LP decision today, or your GP might not invest the money into three years, so you won’t miss this, this with this window,

Ross Butler

Which some could say is central to its inherent advantage because you can’t just flip flop and change your mind. You’re, you’re stuck in it through good and bad.

 

John Gilligan

That’s the reason it doesn’t spread risk is because you, you, you made your bet and you bet on it. Now the secondary markets and the ability to do leverage positions, changes out of bet and it’s eating away at the edges of it. The analogy that runs through my head is a bit like you know, when people used to snip the edge of coins in the 17th century, there comes a point when you’ve debased the coin. We’re not there yet, but that’s, that’s, that’s a sort of a similar analogy. We’re just chipping away at the model a bit, bit by bit. And the original model of you. And I set up something for 10 years at the end of 10 years, if I’ve made some money, you pay me 20% of it. And if we haven’t, you don’t, that models are now evolving very rapidly.

Yeah. And, and so the jury is out on the performance of debt bonds, but do either of you have a gut feeling with regards to the impact of debt funds on mainstream private equity. If we were to hit a situation where there was a lot of workouts and insolvencies and so on,

I mean, that’s organizationally, that’s the interesting thing about the smaller funds is they don’t have the internal organization to do that because they weren’t jumping around long enough and working things out is, is a labor intensive exercise. So then one of my, one of my colleagues I’ve been on the investment committee, a big issue, investor impact investor. One of my colleagues is of work is a partner of a workout fund. And what they do is they buy other people’s problems and solve them so that, you know, there are routes to, to solve these problems. But the original investor went to the benefit of that when you invest in. So there is a question as to are there enough people to know how to do this and all the in the right place, because they’re originally in the banks, the banks had workout departments. Now, maybe those people are all the people that are sitting in the, the debt funds now, because many of them would have left. But, you know, that’s the question

David Petrie

I think the other couple of other interesting things to say about that question, Ross as well. I mean, the first thing is that we’ve not really seen the level of insolvencies that we were anticipating, or indeed that many of us anticipated at the beginning of this back in back this time, last year, really all last March when we went into the first lockdown you know, the statistics are very, very clear. You know, the number of insolvencies is Cigna is, is less in Q4 of of last year than it was in 2019. So that’s, that’s the, that’s the first situation. I think many of these businesses are not that many of the difficulties for debt funds haven’t yet hit. As John has mentioned, you know, those private equity houses that have found themselves with businesses where they’re working, capital’s got stretched to such a level that there that businesses is unsustainable.

I suppose there’s no other sources of capital. Then they’ve, they’ve taken some fairly urgent action or some too desperate action in some cases. So there have been some high profile, private equity backed failures in the sort of within the sort of six months kind of horizon of the crisis biting. But they could, well, if some of those could well have been businesses that were already struggling for a variety of different reasons, I think what is also interesting is what you’ve seen or what we’ve seen more broadly with the actions that private equity took you know, over the past nine to 12 months. So the first thing that they did was look very carefully at their existing portfolio. Some businesses were doing well and others were clearly under a great deal of strain. So the things that private equities consistently argued that it does well is bring professional management into businesses.

So in, you know, ask providing an external perspective and looking at ways in which the business could be adjusted, working capital management could be improved yet further diff unfortunately difficult decisions could be taken in terms of reducing operating capacity and sadly reducing head counts. And so on the private equity funds took those. They, they move very quickly with their existing portfolio businesses, but then they also found that they had a lot of investee companies that were pretty much business as usual and alongside that they also changed their investment philosophy and private equity for, for many years is recognize that it can change the significantly changed the value of investee companies by building together similar companies as so-called buy and build approach. They recognized that this was a very, this was a, this was still a way you could do deals during lockdown. So John said they could, you know, you can, de-risk an investment because chances are what you already know the sector by definition with buy and bill, because you’ve got an investee company in it they’re already, so you’ve done your due diligence on the market and the dynamics of that, your content about that.

And there’s a very good chance that the management team probably also know personally, you know, the other people within the target company, they met, they certainly know the customer base, the dynamics of it and so on. So that the private equity houses are able to use their existing resources, existing management teams, and so on to help them do due diligence, due diligence, investment targets. So we saw that developing as a way for getting transactions done.

John Gilligan

The great truth of private equity is cost of capital drives a lot of things. If that’s cheap, then, then transaction sizes rise and the are recalled giving a lecture 18 months or so ago with a colleague from Goldman Sachs he said, look, it’s a bit like being in, in the final of the French open, which still has you still have to win by two clear games in the French open, so you can keep playing till the end. So it could be 17 all, you know, the ends on the way, but you have no idea whether it’s going to be 1917 or 39 37, but it felt like that before we came into the crisis, because we were at the top of the market. And so when we submitted the book to the publishers, we actually said, again, we submit this nine we’re at the top of the market.

We had no idea virus was going to be the thing that disrupted it. I was completely surprised it was all obviously, but it’s still the case that we have this strange atmosphere across the capital markets where the cost of capital is distorted by quantitative easing and low interest rates means that the asset value inflates and when that’s unwound, the asset values will fall. We just don’t know if that’s going to unwind quickly or slowly or how that’s going to happen because nobody’s ever done it before. And the change of government in the state Springs to Janet Yellen back to the table. And she was in the process of slowly unwinding that towards the end of the Obama era has moved. Music has changed because the world’s changed. But that’s the kind of the, the big unspoken elephant in the room is what happens if interest rates rise significantly, because that goes back to the evidence-based, doesn’t it? Because the majority of the growth in this industry, I mean, it was a cottage industry before quantitative easing almost, and now it’s huge for many years.

So yeah, nobody knows. And I guess the, the other thing going back to David’s point is, yeah, there have been some sectors that have done phenomenally well, you know, software being the quintessential beneficiary of lockdowns. And then there are the sectors that I think David was alluding to where they’ve they’ve had problems, but those that are backed by investors with deep pockets, see it as a time to go hunting. And they may well emerge even stronger because they will dominate their sector, I guess, having rolled it all up. I mean, there, there is that. I mean, there’s the buy and bill thing is an interesting change. One of the questions that perplexed me since I started doing this all those years ago is all the academic evidence. We have suggests the M&A generally destroys value and all the academic stuff we’ve got about private equities, generally private equity at a gross level, outperforms markets, private is an M&A driven business.

That’s what we did. So how come the business that is focused on M&A and pretty much something else is outperforming the market when all M&A token taken around generally suggests that it’s quite distorted. And this is the kind of question that we wrestled with for years and years and years. It’s what we call the paradox of private equity is people do M&A and they make larger gains that larger returns than if they didn’t.

 

Ross Butler

David, that a controversial statement, I guess, from your perspective as a chief executive, the corporate finance faculty.

David Petrie

We tend to take a slightly different view in a rather more optimistic view to the value added by M&A than than, than perhaps Johnson indicated in the academic evidence. We always used to be entertained by a report that used to be published by one of the major accounting firms suggesting that M&A destroyed value. And we thought, why the hell are these guys publishing this? But of course, what they were publishing this fall was because they, the, they are, their argument ran of course, well, smart M and a with good due diligence and so on and all of these things. But of course, nobody goes into a transaction expecting it’s a fail. You know, so what, what has happened that has may have resulted in reduction in value, and the answer is things haven’t worked out the way you thought they would.

Yeah. So why is that? And these, these can be systemic issues. They can be political, you know, it’s all the usual, the usual analysis that John and his colleagues teach their students in business school. One of the areas in their pastoral analysis has changed beyond their imagination, original imagination. If there’s something fundamentally wrong with the target, then even some of the largest examples illustrate that it is possible typically to take legal action against the the sellers. Americans are making a very unfair to Americans by the way, for any Americans watching, but in the unit in the U S I should say, I should preface my remarks by saying that the use of warranty and indemnity insurance is become much more widespread than it ever was 10 or 15 years ago. And also the propensity to claim against those policies, which is where my well, I’ve dragged my Americans into it.

You know, the, there is evidence that suggests that American acquirers are more inclined to claim against WNI policies than perhaps it’s typically the case in Europe. And that, again, I think is a function of the way that those transactions are done again on the basis of completion accounts rather than the lock box mechanism, which is you know custom and practice in the UK, but it’s not to say that these things, you know, won’t won’t change. And but I think, I think there are lots of probably lots of factors actually, which might contribute to things, not working in quite the way that people expect, but it’s not something that we tend to like to talk about. And a few years ago Vince cable had had a good look at this and commissioned a piece of piece of research.

Looking at the value that M&A did actually add to the markets and that particular research illustrated that the impact was, was relatively neutral. But in the corporate finance faculty, we give an award every year to the public company that has added most to shareholder value through the use of M&A activity. And this year we did an analysis to look at past winners of these awards, because of course, as many people know, a lot of companies fear the curse of the award. As soon as you get given an award values collapsed, and something goes horribly wrong. This is not the case, actually, in, in eight out of 10 of the businesses that we gave an award to. And given that they were all public companies, if you’d invested in the stock of each of those businesses, you’d have, you’d have generated a return. That was significantly ahead of any average industry and most tracker funds, because these businesses were making very judicious use of M&A and very effective use of M&A to add to shareholder value.

John Gilligan

Yeah. what, what, what may am I kind of pick to weigh out over the decade was trying to answer this question, how come this thing is happening? And we think on the conclusion of the book in a sentence is we think it’s about process. We think it’s the fact that private equity firms are good at doing this stuff because they do it in a fixed process. So there are other, like, there’s this idea that great deals get done over a napkin, sitting in a bar over a bottle of wine between two entrepreneurs. Those are the ones that probably go wrong, because if you do a process and you have a process that you do every time, what you do is you select out the failures quite, quite efficiently. You know, there, there are waves that can swamp you like this tsunami of, of, of the virus.

But if you select it are all the things that you could have selected out reasonably, then you avoid the losses when you avoid the losses, that makes a big difference to where you’re going. And we think, but we haven’t yet been able to demonstrate, cause we haven’t figured out. We never quite figured out how to do it. In fact, I’m doing some work at the moment that I called Tim Galpin, Oxford on this is what is defining the success of private equity is two things. One is the, on the way in, there’s a process that not only buys as well, but implements the purchase process. Post-Completion well, so the a hundred day plan thing. So due diligence turns into action. And secondly, the focus on exit makes people do it quickly, because if there’s one thing to say, I’m going to change the strategy of this business over the next decade.

And there’s another saying, I’m going to have to do it in the next three years, three to five years, and you can just work quicker. And we think those two things are at the heart of, or probably our conjecture is that those are at the heart of why this works. That sounds plausible to me, but could you not kind of zoom out a little bit further and say, well, the processes, the function of the structure of the LP structure, it’s not just the LP strip to think about the different surfaces. Imagine I sort of business GE some years ago, and they’re really good acquirers. They have an internal process, but it’s all internal. So it’s an internal process. And their level of knowledge in that process is limited by the number of transactions they do, which is a lot or used to be a lot when they were very inquisitive.

Now imagine that your, I don’t know, pick a fund, doesn’t matter. Most of those funds externalize the process. Private equity is a big user of the services provided by people like Amelia and other people know we did a lot more transactions than anybody else did. So we learned more. So the, you know, the big four accounting firms and GT and BDO below them do more transactions per year than any private equity fund in the world by orders of magnitude. So funnily enough, the people who have come across the problems tend to be in those footsteps. Some of them ended up moving into private equity. So one of the conjectures is that by externalizing a large proportion of that process to people that you work with consistently, you’ll get the benefits of their learnings. And therefore you avoid mistakes. You would have made had you not used external advisors, corporates use of external advice less, and therefore they’re more likely to fall for their own beliefs as it were. They don’t have an external check mechanism in the same way. So when we were conjecturing that, you know, you hear a lot about passion and vision, all these sorts of things in business schools, and my colleagues do all this, but maybe here competence is what we’re talking about. You know, being very competent, a process might make a hell of a big difference.

David Petrie

Yeah, yeah. I was just going to say that that certainly the view expressed of course by very many of the members of the corporate finance faculty who are themselves advisors and they do, as John says, they do, they do see the same things day in, day out. And you know, again even some of the larger or mid market houses, I guess in the UK might do 10, 15, 20 deals a year, but they’re certainly not seeing exactly the same thing in quite the same way. And the increasing specialism within the advisory firms as well, again, increases that level of expertise and that ability to be able to say you know, this, what this, this could be, this could prove to be one of those unforeseen difficulties that I was talking about a little time ago. They’re not really unforeseen they’re they’re things they’re factors in investment risk that people just might look at differently and be proud.

And to actually take a, perhaps an artificially optimistic view about at the time, because it happens to fit with company strategy. And I think that to, to sit alongside John’s analysis or perhaps to, to, to add to it or to add facto, no doubt they’re considering is that I think in private equity, they’re set up to monitor changes and KPIs within a business extremely closely and where things are going wrong. They will tend to know potentially anyway, not this is generalizing, but perhaps quicker than they might within a private company or public company, perhaps they will know sooner that something’s going wrong. And, and also perhaps they will be more inclined to take action sooner. You know, one of the facts and perhaps John I I’m worried that I don’t now have academic evidence to support this, but there is a lot of anecdotal evidence amongst the advisory community to suggest that private equity managers change management teams

There’s, there’s evidence of that. There’s, there is evidence that private actually changes management board, anybody else? Absolutely here.

John Gilligan

Yeah. And they’re doing that in order to, they are proactive managers, they will step in and intervene. And there’s not necessarily perhaps the giving an investment, the benefit of the doubt, if we could call it that, that you might get in you know, a, a public company transaction where it might be, well, we don’t quite know why this isn’t working, how much of what we’ve bought is, is now integrated within the much larger organization. And therefore it’s less easy to assess exactly how much value that it’s actually added to the, to the, to the whole. Whereas if you’ve got the thing running discreetly, it’s much easier to to assess its performance. So there’s a whole series of different factors that are at work here and academic support and analysis of these things does allow for directors to challenge some of these, these concepts, these ideas that, you know, we know that we need to be careful with M and a, because, you know, we’re concerned it doesn’t necessarily add value. And how can we change our processes, try and minimize risk, taking it back to private equity demystified. That’s where, you know, some of the principles in private equity may not think about some of this stuff quite that way all the time, but having, going back to the text and say, yeah, actually that’s an interesting trend. We need to have a bit of a think about that. It’s really great

Ross Butler

And he’s coming on again soon to talk about his new book on, on governance, which, sorry,

John Gilligan

I was reading Simon Witney’s new book on Governance last night, a friend, and there’s a point that he makes in that book, which is far more scholarly than I am, and often a lot, lot smarter than I am. But the point he makes is, is that if you stand back from this and look at the simple decisions you make as a shareholder shareholders in public companies have the option to sell. So the private equity shareholder has to have the option to fire because they don’t have the option to sell. And so the reason you change the management is because you don’t have the option to bail out. And that’s, that’s the sort of the contract you enter into. You have this simple idea of if I don’t like you I’ll sell and that we know that will be affected, the market will make the price of the asset fall because of that, you can’t do that in the private equity world, or couldn’t historically get this bit of secondary trading. You can do it on now. So you have to have the option to fire because what else can you do now? There isn’t a third option. And that’s, that’s again, one of these things that David was saying, I mean, it changes the game. If you can’t sell, you got to do something else.

 

Ross Butler

Yeah. There’s an interesting interplay between the advantages of the governance model and the advantages of the process that you outlined as well. And obviously they’re interlinked, but they are separate as well. Yeah.

John Gilligan.

Yeah. I mean the governance thing sort of comes from the process. And so there’s a process on the way in which is a bit I know. Well, cause you know, I was an M and a person and then there’s a process once you’re in, which is, which is kind of embedded in the, in the governance piece. And the thing that strikes you when you deal with a private equity fund year on year on year, is how consistent that process is a cost of pay.

Ross Butler

I’d really like to try and bring you two together on the point because I think it can be done listening to you both. And so let me try you on something, which is that the academics may have discovered that MNA may on average destroy value, but the average does not necessarily dictate the overall benefits of an activity. And David’s prize is highlighting people that have hits upon a successful formula and are accruing knowledge along the way. And your description of private equity does the same thing. And so while the average may destroy value the activity as a whole may be a creative

John Gilligan

That’s absolutely. Right. Right. So the, the whole, one of the biggest problems that the conversation about private equity has generally is the average is a coastal over the place. So the average return on compared to the average return on a market, is that a meaningful thing? And the answer is, well, not really, it’s not meaningful for a number of reasons. One, nobody buys the average. When you put leverage into things, you make the dispersion of the distribution bigger because you amplify everything. So th th this constant question of does private equity outperform the market. I sort of got to the point where I don’t think the question makes any sense anymore because there’s now leveraging funds. So I, as an investor in the fund, first of all, investors don’t get the same deal. If I put a hundred million pounds to a fund, I get a different deal.

And if I put 1 million pounds at the same site, secondly, there’s leveraging funds that comes in and out. So depending upon when I’m in that fund, if I’m trading in the secondary market, my returns would be different to yours if you stayed in across the whole piece. So even within one fund, the LPs are getting different returns. So what does the average mean? No idea. And then there’s this, this, this whole question of what does it, what’s the average of what if you’re doing turnaround investments in France and I’m doing buy and builds in Spain? Are we doing anything similar? I don’t know my organization, it looked very similar when we draw an organization chart. I mean, might all be in my book and, you know, we might put them down as a private equity fund, but is it really sensible to compare us?

Because the strategy is really the question. The real question is an investor is what do you say you’re going to do? Did you do it and give him the risks I took? Did I get a return for it? And comparing, I know every always picks on KKR. So I was picking know some large buyout fund CBC, God fed. Doesn’t worry about it too. LDC or inflection, or I don’t know somebody else, is that a sensible thing to do know? It’s a bit like comparing the performance of somebody in Chelsea football club to somebody in Harlequins rugby club. They’re both playing a sport with a ball on a field, but they’re not trying to do the same thing.

Ross Butler

Have you come across the American intelligence definition, the difference between a puzzle and a mystery, which helped probably mangle, but puzzles. Basically they have an answer, at least in theory, they can be sold computationally and mysteries don’t have a single answer. And even when you have all knowledge, it’s still unclear what it is. And so it strikes me that private equity demystified as a title is peculiarly appropriate. And obviously it’s very much needed as well. So it’s been a great pleasure speaking with you both. And I really commend the book. It’s it, it’s actually a good read as well. Thank you.

John Gilligan

And also, so that everybody buys it, I don’t make any money out of it. We give all the money to the big issue where I’m a trustee of the charity. So if people want to give money to charity and also learn about, about private equity, as I said in the post on LinkedIn, it’s not bandaid, but it does a bit.

 

#18 Vania Schlogel, Atwater Capital

Fund Shack
#18 Vania Schlogel, Atwater Capital
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Vania Schlogel is managing partner and founder of Atwater Capital, an LA-based international private equity firm. You can watch the video version of this conversation here.

Vania Schlogel is managing partner and founder of Los Angeles-based Atwater Capital, a private equity firm with an exclusive focus on media and entertainment. Vania cut her teeth at Goldman Sachs and KKR. She was on the board of Pets at Home, and she was CIO of Roc Nation, Jay-Z’s entertainment agency. And she currently sits on the boards of private equity back to media and entertainment businesses across the US, Asia and Europe.

ROSS BUTLER:

Vania, welcome to Fund Shack. You are quite an unusual private equity investor in as much as the creative industries don’t scare you. In fact, that’s what you focus on, specialize in. How did you get interested and involved in it?

VANIA SCHLOGEL:

I saw so much value from marrying those two worlds. So the very kind of disciplined and rigorous private equity side of things with the innovation from the creative world. And I just always had the natural interest in it. The creative side of things, obviously as, as, as an individual who consumes content and music myself, and as an investor really experienced that marrying those two worlds could actually help an investment in terms of equity, value creation, generating returns on behalf of our LPs. And then I know this not many folks were doing it, so it seemed like a natural opportunity to get in.

ROSS BUTLER:

So what, what, when was your kind of Eureka moment that actually there’s an investment opportunity in this industry?

VANIA SCHLOGEL:

When I was at KKR one of the investments that I was involved in was the buy and build strategy that built what is BMG today. One of the world’s largest independent music publishers, and it was really my first foray and ability to actually invest in the creative industry. And I think one of the things that was very successful about that investment is we, as investors were able to go in and provide a body of knowledge and expertise as to what we were good at and focus on that. And I think what we did really well is let the creative guys focus on what they’re good at. And so we were backing a great management team and company with capital and M and a and integration expertise. But then we also knew when to not overstep our bounds. I can’t recall who said it, but there’s, there’s this joke in the music industry about the CEO that wants to see himself in the music videos? I think the most successful thing we did is we made sure that we were not the CEO that wanted to be in the music videos or the shareholders or board members, however, you’ll term it. And, and that was my Eureka moment where I said, this is a great investment. It’s a lot of fun. I tangibly understand it. I get along really well with these creative executives. And from there on, it just became as you know, what happens in life, you one thing, and then suddenly more opportunities keep coming in that vein.

ROSS BUTLER:

So you, you had it with a traditional private equity house, but why do you think the traditional private equity market doesn’t see it as necessarily a big sector ?

VANIA SCHLOGEL:

Well, I,do think they see it as a big sector. I think that there is more appropriately put there’s a lot of opportunity from actually investing in the sector, but then taking the next step of being really operationally involved and plugged in with the creative sector. And I think the primary reason, honestly, why it is not a big operational focus for large private equity shops is because they’re very, very good at what they do on an operational level. So implementing an ERP rollout or optimizing a supply chain, these are scaled replicable, operational strategies and processes that they can apply to their portfolio companies, really building a deep partnerships. And the operating level with creatives is time-consuming and not always replicable to other portfolio companies. And so it’s more of, I think, a scaling issue and we’re kind of happy being the smaller fund that goes ahead and steps into that role as a partner to a lot of larger GPS.

VANIA SCHLOGEL:

Yeah. It’s a chemistry thing, presumably that, you know, people that set up creative business are probably quite different to almost any other kind of business, I guess, and you have a good kind of chemistry with them. It sounds like.

VANIA SCHLOGEL:

Yeah. And I think at the core, in any case investing is a human centric business, but when you do delve into the creative aspect and, and partner with creative executives who are very much more around, you know, emotion and being led by intuition, it is very important to jive on a personal level and to really take the time and build those relationships. And I will say that despite the fact that we have wonderful working relationships with a lot of creative executives, myself and a lot of Atwater’s executives are also personal friends with our creative partners. I think that works really well for the industry.

ROSS BUTLER:

It’s quite a rare individual to be both creative and to be able to be more financially focused as well. Do you come across many creative entrepreneurs that can and do do both?

VANIA SCHLOGEL:

It is, I would say it’s more of a rarity. I definitely have noticed that a lot of a subset of folks that do this really well seem to be founders and entrepreneurs. So we back, for example, certain portfolio companies Oscar Hoagland, who’s the co-founder and CEO of epidemic sound. He does really well in terms of liaising with both communities. And so it’s not a common skill-set. We do see it, but I would say I see it most often among CEOs and founders, and maybe it’s because I don’t know us founders, we have a, a little bit of that craziness, the risk taking the innovative, whatever you want to call it, but just enough there that we’re willing to kind of get out of maybe the modality of thinking in a, in a typical private equity or consulting or whatever.

ROSS BUTLER:

So you will come your private equity firm Atwater it makes it a virtue of being operationally involved in these creative businesses. To what extent do the businesses that you invest in kind of welcome operational input and to what extent do they need it typically? Yeah.

VANIA SCHLOGEL:

Well, let me answer the second question first, because I think that’s the easiest every business, every individual, any organization of people can improve in one way or another. That doesn’t mean that our ideas are always right. And in fact, that’s one of the first things that we strive for in our relationships with management teams is feel free to kick us in the teeth and tell us if these ideas are completely asinine. And we genuinely mean that. And but is the, is the opportunity for improvement there? Absolutely. And the best founders and management teams recognize that then going to your first question about how welcome is that we as a fund, so we’ve invested about a hundred million dollars since I founded the fund in 2017. And in all our investments today, we’ve been a minority shareholder de facto.

VANIA SCHLOGEL:

That means that even if I wanted to, from a governance perspective, I cannot come down with edX from above and say, this is what you must do. And in any case, I genuinely think that’s kind of bad, bad governance and a poor way of managing these relationships because a lot of the CEOs and founders that we work with have been in the business for years, sometimes from inception. And so it’s incumbent upon us to actually come up with ideas an operating level to, to present a Rolodex within the industry that is exciting for management because we’re very open about the fact that yes, despite the fact that we may be represented on the board and can vote shares a certain way. My personal experience has been in less management really wants to work with you. Your operational strategy is not going to be that effective. And so it is a foundational thing for us to come in as investors and really form number one, deep personal relationships. And number two, actually show up with the goods because we’ll get called out right away by these very demanding founders and CEOs. If we’re not showing up with something that’s helpful for their business,

ROSS BUTLER:

And what’s the competitive environment like for attractive assets in this sector,

VANIA SCHLOGEL:

I would say our sector is more, is more right for proprietary deal sourcing than potentially other sectors. And it goes back to what we just talked about, which is that kind of creative and founder led group of folks. There’s so much that is based upon relationships and how well networked are you in the sector? How well-liked are you do founders talk about you in a positive fashion. And it’s interesting, both what I’ve witnessed is both on a positive and negative level founders. It will, it will spread like wildfire among founders, if you are seen as either a great partner or not a very good partner to management. So I actually think within the sector being, being well-networked and well-liked lends itself to proprietary deal sourcing, which means it’s outside of a normal process being run for example, by an advisor. And in that kind of case, that’s actually the ideal scenario because it’s not a competitive process. Aside from your main competition being against yourself, are you presenting a compelling case to the founder and CEO and the existing shareholders that you’re worth it, that they should sell some of their shares to you because you’re going to, going to bring value.

ROSS BUTLER:

Yeah, I can imagine that the LA creative great vine is quite sophisticated and active, so the word would get round, but you’re not just you’re based in LA, but you have an Asian presence and you recently did a European deal as well. Talk to us a little bit about your kind of geographic coverage.

VANIA SCHLOGEL:

It’s really funny because prior to parasite winning an Oscar, which is a South Korean movie, we would always get the strangest looks when I would explain that we have offices in Los Angeles and Seoul, South Korea, because most funds are based in New York and London and San Francisco. And then when they go to Asia, they immediately typically go to Hong Kong or Singapore, you know, kind of a financial hub. And the way that we explained it is we’re operational investors. And hence we launched in Asia in a very operationally relevant geography. So South Korea has the fastest internet speeds in the world. It’s a thriving and healthy democracy. It’s intellectual property protection laws are very robust. All that put together means that the monetization methods and kind of the business ethos, also legal protections endemic to South Korea, feel very natural for Western portfolio companies to launch into a, so you have to get over.

VANIA SCHLOGEL:

Obviously some of this is natural, no matter where you expand to globally, but, but you know, you need to be comfortable with the language barriers the cultural differences and being respectful and mindful of that. But once our portfolio companies launched there it feels much more like a fish in water in terms of them looking around and saying, Oh, okay, I can still sell my intellectual property for example, and monetize it the way that I would, whether I were based in Sweden or New York or, Seoul. So that’s one of the reasons that we set up a presence there. And going back to the example, also a parasite winning an Oscar, we identified very early on that for whatever reason, Koreans are very good storytellers. And so there’s always been a large body of a great intellectual property and content trends coming out of South Korea.

VANIA SCHLOGEL:

And so as the fund focused a lot on entertainment, media, and content, it made a lot of sense to us to be present in cities that were driving these trends. And it’s one of those markets where a company can launch. And admittedly, it’s a very small country and a very small core addressable market, but given the ability to export cross border a company can look into expanding into adjacent geographies, Japan, Southeast Asia, China from the, that kind of launchpad in South Korea. I would almost liken it to Sweden in that sense, what Sweden is to Europe, pretty small addressable market, but, you know, Spotify did all right.

ROSS BUTLER:

Absolutely. And so speaking of Europe, you’ve got some activity there too

VANIA SCHLOGEL:

Well. We’ve actually invested quite a bit in Europe. So we’re invested alongside KKR in a company called Neo nine studios, which is Germany’s largest production and distribution company in the country. I chair the board there were invested alongside EQT and epidemic sound, which is based in Stockholm. I also chair the board of that company. We just closed another investment alongside EQT in Malaga Spain, and a fantastic company called free pick.

ROSS BUTLER:

So under normal circumstances, your air miles are pretty significant,

VANIA SCHLOGEL:

Wonderful from the perspective of never having to pay for a personal vacation ever again. Yeah. I was spending a lot of time in Europe, I lived in London for six years. And so from a, from a sector perspective, I actually think it’s a wonderful geography to in, I think it’s multiples cheaper than a lot of us media.

ROSS BUTLER:

You’re relatively small funds to have a kind of what appears to be a completely global footprint and also personally global responsibilities, a portfolio of companies all over the place. And I guess that’s a function of being a sector specialist. Would you say

VANIA SCHLOGEL:

That’s exactly right. And I wouldn’t say we’re truly global because we genuinely as a operational fund, we have to spend time building relationships and liaising with folks. And so we’re very much present in Europe and Asia, we don’t touch geographies yet where we don’t have executives or very strong partnerships. So that would include, for example, South America Africa, those are geographies where we’re not present, but in Europe we feel very comfortable investing in the region you know, regulatorily regulatory perspective culturally even our role relationship Rolodexes, we feel very natural about investing in the region. And also importantly, we have such wonderful partners in terms of larger GPS that we work with as well as a lot of founders company founders that we know who also keep us connected on all the grounds.

ROSS BUTLER:

Well, I was going to come on to that because it’s very interesting, the fact that you you partner with some of the biggest buyer houses in the world on some of their deals. So they like you and they bring you in, they’ve got enough money of their own. What do they want from you?

VANIA SCHLOGEL:

That’s a great question. We feel a very strong duty towards our GP partners and today we’ve done, you know, we’ve, we’ve invested alongside KKR, EQT in TPG since the fund launched in 2017. And you’re absolutely right. We recognize very much that they have enough capital. They have a large committed funds and they certainly don’t need out water to come in to fill a hole. And hence there is a very strong expectation of performance on our side that in the Venn diagram of things not to get too nerdy, but they’re going to focus on, you know, these, these sets of operations. And we’re going to be over here focusing on our operational strategy and the two don’t really overlap. And that’s great that complimentarity of what we focus on and our expertise, I think is the reason why we get repeat business and repeat partnerships with these GPS.

VANIA SCHLOGEL:

And the other aspect is just we have a very, the way that we set up the operations of our fund are centered around our operational expertise. So I gave you one example, which is we’re present in South Korea because we understand it to be a trendsetter city in terms of content and technology trends, our LPs in South Korea. In fact, for example, Kakao is not only a partner of ours, but also an LP of ours. And if you imagine a digital media and technology group for a given country that owns the WhatsApp, Spotify, PayPal, Uber, and a few other assets of a country that is cacao, and they are one of our greatest partners in LPs. And so when we partner with the larger GP, we can actually go in as one of the only if not the only fund in the world that can say that and say, Hey, when, when this company, this portfolio company is looking to launch in Asia, we’re gonna consult and give a great body of expertise around having done this before. And Oh, by the way, we’ve got a fantastic digital media company there as an LP who now has a vested interest in making a success story.

ROSS BUTLER:

Yeah, that makes sense. So what, what specifically, what sub sectors, what types of creative companies are hot right now, interest you from an investment perspective?

VANIA SCHLOGEL:

We are very much focused on content and we focused on it from, from the inception and we built out a very strong investment thesis to the point where I almost feel sheepish saying content, because it’s such a broad umbrella term, the way that we segmented it is we got very deep into it. And so we’re looking for example, at content that is buoyed by the trend of online creator communities. We’re looking at content that has an over and exposure to growing over the top, or what’s called OTT streaming platforms like Netflix or Amazon. So while we spend a lot of time in content, we actually very delve down into those sub sectors that we feel have kind of acyclical component, but also from, from kind of a meta-thematic side being buoyed by digital trends and digitization, which COVID, by the way only helped to hasten quite frankly.

ROSS BUTLER:

Yeah. It’s interesting. Like when the, in the first internet, boom, like 20 years ago, everyone was constantly saying content is King, but looking back, I sometimes wonder whether actually for that first wave, but networks were King because the ones that did really well were the companies that capitalized on people’s people’s networks and kind of get the sense as you say, particularly with lockdown. And now that everyone’s got decent broadband and streaming services. And so on that the content might finally be having actually it’s it’s time in the sun. You’re gonna, when you think about that, like orthosis,

VANIA SCHLOGEL:

I’ve had this debate so many times about content versus distribution. And I think one of the most interesting case studies is what happened with Netflix. And I re you know, prior to launching house of cards in January of 2013 it was a pure play distribution platform, and I’ll never forget the production costs that were quite heavy for house of cards that Netflix had undertaken. If you actually have the interest and go back to a lot of the equity analysts and what they were saying about Netflix, it was brutal. I mean, it was just, this is daft, this is how many subscribers they would have to get to recoup this, and it just ripped them to shreds and what happens, they launched house of cards and in quick succession orange is a new black, the Marvel kind of TV series spinoffs, et cetera, and their stock price within the next year two and a half 10 next.

VANIA SCHLOGEL:

And, and so I think it’s I tell you that anecdote because where I land is that it seems more and more these days. It has to be the marriage both. Now, that being said I don’t know. I don’t mean that to say that there is not an opportunity for induction and content creators. I absolutely think that opportunity is there, but in, in order to really sell and continue selling in a systematic way and not be hit driven, these content creators need to focus on franchise defining or tentpole content to really have viable business models and also to try and own some of their intellectual. Are you going forward rather than just being a licensed, sor and working for fees in terms of the monetizing, their content? The other thing that I think is positive or content creators and intellectual property owners, is that pro in, in a, in a prior world, these content producers were selling into the traditional set of media buyers.

VANIA SCHLOGEL:

Then they were selling into the traditional set plus Netflix, and now the world has opened where now they’re selling into to Apple as well and other new entrance. And so it’s a great time to be a good content producer and intellectual property owner because the buyer set is proliferating. There’s just more and more buyers now of good and franchise defining content. I think one of the other things, and this is why we invested, for example, in Leonine is one. Yeah, the great things that happened from Netflix. And I actually mean this at associate level is because, so Netflix was able to aggregate eyeballs at a global level. There became this re-education process in the entertainment world that we are willing to watch local language, film, and TV, whether it’s the example of parasite, which is completely in Korean or dark, which is in German.

VANIA SCHLOGEL:

And so this put the emphasis and investment again in local language content. And I think that’s really important and social level. I don’t think we want to see a world where 98% of content is created and generated out of Hollywood and has an American perspective to it. I think we really want to honor diversity of content and also local traditions and cultures. And I think that’s one of the great not to go on a tangent, but it’s one of the wonderful things that actually has come from technological distribution is a refocus, any commercial case that now puts investment back again on local language content.

ROSS BUTLER:

I understand that a lot better now, because when you started speaking, I was going to say that all sounds great, but there’s, there’s only one Netflix, but I mean, Hey, that’s not quite true, but also it sounds like Netflix allows a whole ecosystem to happen as well in the same way, as, I guess, Amazon allows a whole ecosystem of suppliers to feed into it and get greater distribution. Yeah.

VANIA SCHLOGEL:

Yeah, absolutely. And I think to be fair, there need to any time one seeks a sustainability and health of an industry, there need to be countervailing forces. So while I’m also very positive on some of the positive things that Netflix has engendered why, why did we invest in Leo nine Leo nine took five companies and consolidated them into the number one player because scale at a local market level is a net necessary countervailing presence to a global technology player like Netflix. So I think for the health of the industry, also the, for the health of consumer choices going forward and for greater investment behind local content we as investors are placing our bets and trying to have scaled local players rather than just a fragmented market.

ROSS BUTLER:

Oh, these kind of film production companies, they, they are, they’re kind of like finance houses in themselves. Aren’t they, to some extent cause they’re then financing projects,

VANIA SCHLOGEL:

They are. Yeah. And that’s, that’s also why scale matters because content behaves very similarly to venture capital as an asset class, meaning you have a few real outliers in terms of performance and a lot of losses along the way. That is the nature of content that also scares a lot of investors. And so the way that we approach the sector is with eyes wide open and saying, we understand that’s how the asset class performs, but we also understand portfolio theory enough to know that diversification diversifies a way that unique hit risk. And so if a, an asset is scaled enough, it’s producing it. Number one, it’s producing enough new shows or films. And number two, it’s typically paired with an existing library that generates stable cash flows. And so I think there’s a perception versus reality gap. A lot of times when it comes to investors that investing in the content space, they just look at that unique project risk of it’s going to be great, or it’s going to be an absolute unmitigated disaster. We don’t view it that way. We view it as, as long as we can get into scaled ventures. A lot of that unique risk can be mitigated.

ROSS BUTLER:

Hmm. The fact that you’re partnering with big buyout firms also suggests that the risk profile isn’t that venturing. Yeah.

VANIA SCHLOGEL:

Yeah. That’s absolutely right. And, and Leonine, for example, spent the better part of two decades, for example buying up content and has eight, the best library in Germany. So as, as one example of why that’s so important when COVID hit and for a period in, in Germany productions completely shut down of new content, we were sitting on the country’s largest library. And so while we’re all hunkered down, bored out of our minds, looking for titles, and we’re going back to Tomb Raider and Home Alone and all those things that we watched in the past 20 years that library was generating fantastic cash flows for the company. And I think that’s a really good example of how an asset class that can be perceived as, so hit-driven actually ended up being one of the most sheltered and a cyclical assets as evidenced by what happened after COVID hit.

ROSS BUTLER:

Yeah. That’s amazing. Isn’t it? Do you want me, what’s your view of the future of private equity meeting, creative industries? Would it always be bore the specialist to some degree, or do you think there’s a larger opportunity opening up

VANIA SCHLOGEL:

Trend of a lot of pro previous operators within the media and entertainment space? Raising capital, for example, they’re, they’re doing a lot of fundless sponsor activity. I, I, you know, there are certain situations I can’t comment on now, but very well-known media executives who have identified proprietary deals as we talked about earlier and then going, and either partnering with private equity or with family offices, the rise of, of family offices, for example, has opened up a brand new and innovative kind of funding pocket. And, and they’re going about it that way. So it’s, again, it’s one of those industries that, and I mean, media and entertainment within private equity that is not only within it itself, but also the, the industries that are tangential to it. So media itself is constantly evolving, but also the way that private equity invest into media, it’s constantly open to evolution and sometimes outright tumbled. And so I do see that going forward, there’s going to be much more of a trend and continue trend of very well-known operators who have left their operating posts and want to try their hand at investing. And they’ll find funding, whether it’s through respect partnership. Spacs also, that’s part of the reason why there’s been such a rise in space.

ROSS BUTLER:

So is it because of the sector?

VANIA SCHLOGEL:

Exactly. Because who knows the media and entertainment sector better than, than folks who have a deep operating expertise within it. And so now they have creative ways of finding capital and because it lends itself to proprietary deal sourcing, I just think this industry is very unique relative to investing in other industries,

ROSS BUTLER:

Given that you’ve always been in investments and something’s doing creative, you’ve had quite a buried career cause you KKR, you’ve got your own shop. And in between you were a CIO ROC nation with, can you tell us a little bit about what Roc Nation is?

VANIA SCHLOGEL:

So rock nation is founded and helmed by Jay Z, who many people know. And, and one of the really interesting things about Jay, if you look at the history of his career. So yes, he is a very well known rapper and artist, but he’s also had a business savvy. So very early on, for example he structured the deal so that he the retention of his master rights reverted back to him, this is before artists were doing it at a broader scale. And I would say before Taylor Swift, for example, really got on that public messaging about it. And so he, he actually is, is a great example of someone who took his relationships and industry expertise and leverage that into an operational role by setting up rock nation. And so rock nation represents, I believe they started really in music now, they branched out to representing artists in outside of just music and then also athletes professional athletes and moving into those adjacent verticals and really what that comes down to is leveraging a Rolodex of relationships. And then having that credibility that, Hey, I care about your career, your art, I will be a good, good partner for you in a way that Jane the rock nation team can do.

ROSS BUTLER:

And, and culturally going from KKR to Roc Nation, and then to your own shop. I mean, they, they must be big leaps or was Roc Nation, very KKR-like?

VANIA SCHLOGEL:

Worlds apart. They are very, very different. And, and funnily enough, I would actually having experienced on the one, the Goldman Sachs and the KKRs and my career, and then on the other kind of the Roc Nation’s of the world I endeavored to set up the culture of Atwater to be a hybrid culture. So if you ever come to our offices, you know, you’ll see some funky art up, you know, music typically playing in the background. So it’s a little bit of a hybrid.

Avi Turetsky, Landmark Partners

In June 2020, Landmark Partners and New Mexico PERA published a paper outlining a new methodology for calculating private equity performance in dollars, called the Excess Value Method.

In this private equity podcast, co-author Avi Turetsky, talks about how the method was conceived, how it works, can be applied, and the outlook for its adoption as a measurement and incentive payment tool for the global private equity industry.

 

 

#15 Wol Kolade

Fund Shack
#15 Wol Kolade
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Wol Kolade is the managing partner of Livingbridge, a mid-market private equity firm with offices in the UK, Melbourne and Boston.